Auto and semiconductor makers have yet to reach agreement on 2023 price talks

According to Digitimes, the recent price negotiations between the automotive industry and fabs have entered a white-hot period. Among them, a small number of fabs are expected to successfully increase the price of automotive chips. Nevertheless, most manufacturers are still discussing.

Semiconductor suppliers point out that, in some cases, they have come to a consensus. Fabs, IDMs and Tier 1 suppliers can all take a step back and expect manufacturing prices to increase by single-digit percentages in 2023. In fact, at the beginning of the negotiation, the client side made it clear that the price can be whatever the market wants, as long as the supply is smooth.

Some in the auto industry admit they are still negotiating with fabs. Different fabs have different percentages of capacity allocated to automotive applications and therefore have varying degrees of durability in terms of price. With ongoing macro changes, especially inflation, likely to affect consumer power in 2023, the auto industry is still looking for the best way to work together.

Sources in the automotive supply chain pointed out that from GF, which has the majority of automotive chips, to Taiwanese fabs such as TSMC, UMC, and VIS, negotiations are still ongoing, and a small number is close to a final decision. In any case, for most in the auto industry, the negotiations have not gone as smoothly as expected, especially due to the lack of optimism about fab supply growth.

For the automotive supply chain, the biggest constraint remains the limited capacity of factories for automotive-grade processes. This is also the main reason why automotive chips continue to be in short supply. Automakers hope that based on price negotiations, they can also get fabs to accelerate converting most of their potential capacity into automotive applications.

Suppliers have also hinted that the harder part of negotiating with fabs is agreeing on upfront payments. Should they invest in a common future, or just pay a margin for the order?

For automakers, they hope the upfront payment will support fab investments in expanding or converting capacity for automotive use so that their supply can ramp up quickly. The car side can guarantee the order and delivery. During this period, fabs can maintain stable prices and expand the industrial/automotive market. After all, automation and future cars will remain the same trends in the 5G era.

Simply put, they want to build a long-term future that benefits both parties, represented by mainstream IDMs including Infineon, NXP, Renesas, TI, STM or Tier 1.

However, on the other hand, some fabs lead to supply and demand pricing. Production transitions or expansions will be undertaken by the fabs themselves. Quotes will directly reflect current costs. The customer's advance payment is only used for guaranteed purchases during the commitment period. For some fabs, they plan to take advantage of relatively stable industrial and automotive demand and high prices to fill the void created by weak consumer demand.

Granted, most fabs believe that weak consumer demand is due to fluctuations in the economic cycle rather than structural shifts. Therefore, they remain skeptical about dedicating most of their capacity to automotive applications. After all, once the economy picks up, the demand for 3C products will rebound quickly.

For example, TSMC said on its third-quarter earnings call that automotive applications accounted for about 5% of its revenue. Despite the current strong demand, there is still no optimism for the industry.